What has happened in markets?
US share markets fell sharply overnight, following declines in Europe and Asia. This overnight volatility continues a trend of falling share prices across major global markets that began in early August due to weaker- than-expected economic data from the US. These reports have sparked concerns about a potential slowdown in the world’s largest economy. Technology stocks, which have driven strong market performance in 2024, were particularly hard-hit. While share markets suffered, fixed interest (bond) markets benefited as investors sought the safety of government bonds, driving bond yields lower — since bond prices move inversely to yields. The following table shows the performance of major investment markets since the beginning of August, year-to- date, and over the past 12 months (as of 5 August 2024):
What is causing the recent market volatility?
A soft landing for the US economy — which means getting inflation under control without causing a recession or major economic slowdown in the process — has been the goal of the US Federal Reserve (Fed) since it began its current cycle of interest rate hikes. To achieve this, the Fed has been trying to balance constraining economic activity with preventing a significant rise in unemployment. A critical factor in this balance is the timing of the eventual easing or interest rate-cutting cycle, which is a challenging task. Cutting rates too early might seem lenient on inflation, risking a reacceleration, while cutting too late could unnecessarily harm the economy, increasing the likelihood of a recession. Presently, the latter scenario is causing concern among investors.
Although the Fed left interest rates unchanged last week, investment markets are convinced an interest rate cut is imminent, likely at the next meeting in September. However, investor concerns came into sharper focus in the days following the Fed’s decision, after a string of weaker economic data, including the US jobs report for July, which unexpectedly showed the unemployment rate rising from 4.1% to 4.3%, significantly above the 54-year low of 3.4% seen early last year. This increase triggered a closely watched economic indicator called the Sahm Rule — named after economist Claudia Sahm — which links a sharp rise in the unemployment rate to the economy being in, or nearing, a recession.
Despite the Sahm Rule’s historical accuracy in predicting recessions, it does not necessarily indicate an impending US recession. Rather than serving as a forecasting tool, it was designed to prompt the Fed to act quickly to stimulate the economy if needed, such as by cutting interest rates. Sahm herself has downplayed recession fears recently, noting high immigration and lingering aftershocks from the pandemic have distorted the numbers. While the rapid rise in the unemployment rate is concerning, these factors may have artificially amplified the increase. Many market commentators agree the chances of a US recession remain low despite the recent economic data, suggesting the market has overreacted, which can happen when valuations are elevated.
What are we doing in response?
We understand short-term market volatility can be unsettling. While we will continue to monitor the situation closely, we do not believe this is the time to make changes to portfolios or your long-term strategy. Your investment strategy has been tailored specifically to meet your individual circumstances, goals, and objectives. By utilising well-diversified portfolios with the right mix of assets and high-quality fund managers, we ensure your strategy remains on track and can navigate these periods of market volatility.
Market declines: A common occurrence
Market declines are more common than most people might think. The chart below compares calendar year returns and the largest intra-year declines in the Australian share market over the past 40 years. Although the end-of-calendar year returns have been overwhelmingly positive, it is rare the market will go through an entire year without experiencing a meaningful decline at some stage. While unsettling, short-term market volatility is inevitable and a normal part of investing. Disciplined, patient, and long-term focused investors understand this and know that over time, markets always recover and go onto post gains.
Source: Morningstar/Evidentia. S&P/ASX All Ordinaries TR Index since 1982.
THIS ARTICLE WAS RELEASED BY EVIDENTIA GROUP 6 AUGUST 2024
Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
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